The head of the European Commission’s (EC) digital innovation and blockchain unit expanded on the pros of distributed ledger technology (DLT), and the current state of the regulatory framework in Europe.
Balancing Blockchain Innovation and Regulatory Compliance
In an interview with The Banker, a subsidiary of Financial Times, the head of the EC’s digital innovation and blockchain unit discussed the potential of blockchain technology to drive innovation across Europe. The interview was published on Thursday (April 2, 2020).
The head of the EC’s blockchain unit, Pēteris Zilgalvis, pointed out that DLT provides a plethora of opportunities for governments, fintech firms, and other organizations across Europe. Zilgalvis remarked:
“We think that it presents an excellent technology for situations where different stakeholders need to collaborate but, due to competition or legal reasons, they do not want to or are unable to share a single database. In this sense, it can avoid a single point of failure.”
Zilgalvis also indicated that blockchain technology has proved useful in areas such as diploma certification, audit documentation certification, and crypto regulatory reporting to name a few. However, although the EC recognizes the usefulness of blockchain technology in such applications, the commission does not believe it is the solution to every problem.
Regarding crypto regulations and the implementation of policies, Zilgalvis remarked:
“Any new technology is not foreseen in the existing regulatory framework. The European Blockchain Partnership, which is building the EBSI, is like a regulatory sandbox. Together with the member states, the European Commission [EC] and the court of auditors, we are experimenting with the existing legislation frameworks while we are experimenting with the technology.”
Furthermore, the head of the EC’s blockchain unit pointed out that little has been implemented on a regulatory level with the exception of matters pertaining to any kind of currency such as anti-money laundering (AML) and anti-fraud requirements. Zilgalvis also said that the EC has taken note of the rise of cryptocurrencies since 2012 and is yet to outrightly ban anything pertaining to the digital assets industry.
Regulators Assessing Adherence to Best Practice Guidelines
During the interview, Zilgalvis revealed that the EC is also considering the possibility of leveraging DLT to facilitate compliance with AML regulatory policies. There have reportedly been a number of proposals from industry stakeholders across Europe advising banks to collaborate efforts and share relevant information concerning blockchain technology.
In other recent developments, the Financial Action Task Force (FATF) published a report on Tuesday (March 31, 2020) revealing that the U.S. is not yet fully compliant with its crypto recommendations. According to the report from the international financial watchdog, minor deficiencies still remain in the regulatory framework currently in place.
As identified by the FAFT’s report, the U.S.-registered money services businesses (MBSs) keeps detailed records pertaining to crypto transactions in the amount of $3,000 or more. However, recommendations from the financial watchdog advise that the threshold be set at $1,000 in order to combat low money laundering and terrorist financing risks.
In accordance with the provisions of recommendation 15 which was implemented back in June 2019 to prevent the use of digital assets for money laundering and the financing of proliferation, FAFT has rated the U.S. as only largely compliant with the advised regulatory framework.
Furthermore, the guidelines enforced by the FAFT require crypto businesses to obtain accurate originator and beneficiary information regarding virtual asset transfers and submit to the appropriate authorities upon request. This so-called “travel rule” has drawn skepticism from industry stakeholders such as Circle, Chainalysis, and Coinbase who have previously pointed out that complete compliance would attract heavy costs and require unprecedented collaboration between crypto businesses.
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